After having provoked a debate that subsequently involved
Nick Rowe, Brad DeLong and Paul Krugman, I will assert blogowners’
privilege and throw out some summary thoughts.

First, we all seem to agree that in a situation where the economy
is clearly operating well below its potential, governments can
run deficits to boost employment and output. I believe we all
agree that in principle the government can also use these
deficits to increase future output through productive investment
in either physical or human capital. This would make future
generations better off on net as a result of deficits today,
since the economy will be larger than it would be without the
deficits.

I would also add, without necessarily implicating anyone else,
that simply by increasing output and employment the government is
likely to make society better off in the future for two reasons.
First, by keeping people employed we will keep them attached to
the labor force and reduce the number of hard core unemployed who
would be difficult to re-employ in subsequent years, possibly
leaving us with a higher rate of unemployment (and lower output)
long into the future.

The other reason that short-term increases in employment can have
long-term effects is that by keeping families intact, children
are likely to have better upbringings and do better in school.
This means that the next generation will on average will have
happier more productive lives because we used deficits to keep
their parents employed today.

Okay, but even if deficits today don’t reduce output tomorrow,
Nick Rowe argues that by increasing the wealth of some members of
the current generation (those who hold the bonds used to finance
the deficit), we can still be reducing the wealth of members of
future generations. The argument here is that if we get back to
full employment at some point in the future (this is a full
employment argument), the people who hold the bonds will be able
to pull resources away from young people who are entering the
labor force and were not involved in the decision to run deficits
today.

There is some validity to this point, but it is extremely
limited. First, it is important to remember that most of the
holders of current debt will be people who have children and/or
will bequest some of their wealth to their children or charitable
organizations. While children may not benefit one to one from the
consumption of their parents, surely they benefit in part.
Insofar as people with or without children save some of the
wealth from the bonds and subsequently will it to children or
charitable organizations, today’s deficit will not crowd out any
consumption of future generations.

Finally, much of the tax burden of paying the debt service on the
debt issued today will be borne by members of the current
generation. In that sense it is an issue of intra-generational
distribution, not intergenerational distribution.

In short, we can talk about some burden on future generations as
a result of debt issued today, if it goes to unproductive uses,
but the size of this burden is clearly a fraction of the debt and
likely to be a very small fraction in my book. Furthermore, debt
is far from the only mechanism through which the government
imposes inter-generational burdens of this type.

Let’s take monetary policy, the preferred mechanism of Rowe and
others for sustaining full employment. Suppose the Fed adopted a
nominal GDP target. To hit this target suppose it bought up some
massive amount of long-term bonds, both long-term Treasury bonds
and mortgage-backed securities (MBS). This could be expected to
drive interest rates even lower than they are now.

Suppose that the interest rate on 30-year Treasuries falls to 2.5
percent. Let’s assume that this sparks enough demand (along with
expectations of higher inflation) to get us back to full
employment. If this plan goes according to plan, then in 2-3
years’ time the economy will be more or less back to normal with
moderate inflation and unemployment back to a 4.5-5.0 percent
range. The Fed will then be looking to raise interest rates to
keep inflation from rising too high and thereby exceeding the
nominal GDP target.

This would mean that the price of the long-term Treasuries and
MBS will have plummeted. When the Fed sells off these assets to
reduce the money supply and thereby raise interest rates, it will
take large losses. In this story, it would likely need additional
tax revenue from the Treasury to cover these losses. That would
imply a tax burden on future generations in the same way as the
formal debt that so concerns Rowe.

The winners in this story are the homeowners and others who were
able to borrow long-term at very low interest rates. They will be
able to consume more in the future as a result of these long-term
low interest loans, with their consumption coming at the expense
of the consumption of future generations. Shouldn’t we feel every
bit as bad about this story as the story of the deficits that
upsets Rowe? (We get a similar story if low interest rates push
up house prices, thereby allowing current homeowners to cash out
with big gains.)

There are a few other points worth making in this story. First,
there is no magic to zero. Any government spending that does not
have the character of investment can be seen as coming at the
expense of future generations in the sense that concerns Rowe.
Even if we had a balanced budget we could still say that if we
reduced government consumption or increased taxes, we could have
a lower tax burden in the future. It’s not clear what magic zero
holds in this story.

The deficit is also a tricky target. We often get lower deficits
through asset sales of different types. If we balance the budget
by selling off highways or parklands to private businesses that
then charge for their use, it’s hard to see how we have helped
future generations. The same applies to selling off the airwaves
or leasing mineral rights on government properties.

The most important selling off assets along this line does not
involve formal sales but rather takes the form of patents and
copyrights. The government is effectively paying people to
innovate or do creative work by giving them legal monopolies in
certain markets. The discounted value of these monopolies likely
dwarfs the value of the outstanding debt. In pharmaceuticals
alone, the annual cost of patent protection is close to $250
billion a year, 50 percent more than net interest on the debt.
These payments will involve much larger generational transfers of
the type that Rowe raises than the debt.

In short, there are many good reasons why we should be doing
everything we can to push the economy to full employment. I am
inclined to believe that fiscal policy is the most effective
route, but I am happy to push monetary policy as far as we can.
We seem to agree that there is no reason to believe that deficits
in the current context will cause the economy to grow more slowly
in the future and many reasons to believe that it could increase
growth.

There is a limited sense in which the wealth created today can
allow members of the current generation to consume more at the
expense of younger people who will be reaching adulthood during
the lifetime of those who buy bonds today. However the extent of
this intergenerational transfer is likely to be small relative to
the size of the stimulus and is a feature shared with many other
policies where the issue is not even raised.

In short, sorry kids – you haven’t given me a reason to oppose
stimulus.